Breaking the Banks Again

The federal government’s mounting fiscal trouble is rapidly spilling over onto our commercial banks. In the past year they have increased their holding of Treasurys* by 25.7 percent. Commercial banks have bought up $777 billion worth of federal-government debt, putting federal debt at 18.3 percent of total bank assets.

As Figure 1 reports, the rise in debt purchases has been substantial. In terms of asset share, Treasurys topped 20 percent in the early 1990s, but the reason back then was a crunch in household credit as high interest rates coincided with a recession. Today, household credit is cheap and should outperform government debt as share of commercial-bank asset portfolios. That, however, is not happening:

Figure 1

Source of raw data: Federal Reserve

Early on during the artificial economic shutdown last year, banks bought big chunks of Mortgage-Backed Securities. As the year went on and the U.S. Treasury kept pumping out new debt, the banks started purchasing “general” debt as well. As explained in Figure 2, the general-debt share accelerated over the course of the year and now stands at about one third of the federal debt in commercial-bank portfolios:

Figure 2

Source: Federal Reserve

The rapid increase in commercial-bank ownership of U.S. debt is troubling for two reasons:

  1. Banks do not make much money on federal debt, especially not the general debt. As they buy more of it, they have to compensate their portfolios with higher-earning commercial assets, thus exposing themselves to higher risk of defaults.
  2. A debt crisis in the federal government will rapidly spread to the commercial banks, with system-wide consequences for our banking industry and our very monetary system.

In short: until Congress reverses course on its massive deficit spending, our economy is en route to a massive debt crisis with very serious macroeconomic consequences.

*) The spelling “Treasurys” is deliberate. The conventional “Treasuries” technically refers to “Treasury departments”; the spelling used here is an umbrella term for Treasury bills, notes and bonds.


  1. Baker Spring


    This piece is spot-on. I want to add a wrinkle to it. This will come back to the timing of the onset of fiscal crisis. It seems clear to me that the commercial banks have made these purchases because they are taking at face value, pun intended, the Federal Reserve’s commitment to expand the dollar value of the Treasury securities on its balance sheet through purchases on the secondary market at the rate of at least $80 billion per month for an indefinite period of time. It made this announcement last month. On this basis, the commercial banks have no intention of holding on to these securities for very long. They expect to sell a significant portion of them to the Federal Reserve. Let’s be conservative and assume the Federal Reserve intends to pursue this plan at the $80 billion per month rate for all of calendar 2021. On this basis, the Federal Reserve will expand its holdings of Treasury securities by $960 billion this year. The question surfaces as to whether the Federal Reserve can continue with this plan if the level of inflation you and I fear comes about later this year? I think not because the Federal Reserve has a statutory requirement to counter such inflationary trends. It has admitted as much in various statements made over the last several months. The commercial banks will be in a world of hurt when their expectations for Federal Reserve purchases of their holdings of Treasury securities goes unmet. This will be a major contributing factor to the onset of fiscal crisis. The commercial banks, as well as other private investors in Treasury securities, will not be capable of filling the void left by such a reversal of plans by the Federal Reserve in terms of financing the federal debt.